IPO Size: Rs. 1,104 cr
- Fresh issue worth Rs. 600 cr to augment capital (even though capital adequacy ratio of 21% is comfortably above regulatory requirement of 15%)
- Offer for sale (OFS) worth Rs. 504 cr by Oiko Credit and Gawa Capital, completely exiting 12% holding. Promoters Warburg Pincus and Creation Investments are also trimming 49% and 30% stakes respectively, to 39% and 24% via the IPO.
Thus, issue is structured, primarily as an exit route for the financial investors.
Price band: Rs. 350-368 per share
M cap: Rs. 3,703 cr, implying 30% dilution
IPO Date: Wed 2nd Nov to Fri 4th Nov 2022, Listing Tue 15th Nov 2022
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
Microfinance for BIMARU states
Fusion Micro Finance is a 12 year old company providing micro finance to 29 lakh women borrowers through 966 branches in BiMaRU states (Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh), with 54% of Rs. 7,400 cr AUM concentrated in these 4 states.
Healthy AUM Growth
Company increased branch count by 60% even during covid, which lead to AUM growing at 23% CAGR between FY20-22. While FY21 and FY22 financials were impacted due to covid provision, Q1FY23 net interest income stood at Rs. 186 cr (Rs. 328 cr in FY20), with PAT at Rs. 75 cr.
Poor Credit Rating
Fusion’s credit rating of A- is quite low, even lower than peer Spandana’s ‘A’ rating, and 3 notches lower than CreditAccess’ ‘AA-‘ rating. Between FY17 to Q1FY23, when Fusion’s operations were growing, surprisingly its rating improved only one notch i.e. from BBB+ five years ago. Poor credit rating leads to higher borrowing costs, which can be the biggest competitive disadvantage, especially in a lending business. Ability to raise cheap funds is one of the biggest strengths for any lender, as shown by HDFC Group, which has enjoyed premium multiples for decades now.
Higher cost of borrowing has resulted in Fusion’s net interest margin (NIM) at 8.4%, lower than both listed NBFC-MFI peers – CreditAccess (10.9%) and Spandana (12.5%).
Higher Risk of Rising Interest Rates
In addition to above, 56% of Fusion’s Rs. 6,000 cr borrowing is maturing in 1 year, increasing risk of higher borrowing costs going forward, as interest rates are yet to peak out. For comparison, <10% of CreditAccess’ borrowings are maturing in next 1 year. Thus, pressure on Fusion’s NIMs may not end in the near term.
Longer Term Road-Map Hazy
Currently, Fusion’s founder promoter owns 7% stake, which will contract to 5% post IPO. Warburg Pincus and Creation Investments, although classified as promoters, are essentially financial investors, have invested since 2018 and 2016 respectively. Both these funds, will be holding a massive 63% stake post IPO, will eventually look for complete exit in the next couple of years, putting a big overhang on share price. In such a scenario, stock may prove to be risky, even with a decent track record.
The IPO is being undertaken at a post-money price-to-book value (PBV) multiple of 1.8x, making the IPO appear fully priced. Fusion’s net NPA of 1.35% (as of 30.6.22) remains higher than CreditAccess’ 1.15%. 3/4th of Fusion’s micro loans are towards agriculture and related activities. This season, Bihar and UP, company’s key states of operation, witnessed ~30% deficit monsoon, leading to a cautious outlook on company’s asset quality.
CreditAccess’s trades at a PBV multiple of 3.5x given its loan size more than double at Rs. 15,600 cr, besides a better asset quality. Even then CreditAccess’ PBV multiple is perceived to be high, partly attributed to foreign parentage (74%) and partly to concentrated holding with only 4% retail float. Post-listing, Fusion’s retail float will be 15%, so unlikely to command a premium multiple.